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Friday, May 06, 2016

Stocks Manage Gains Despite Jobs Report Miss

Charles Schwab: On the Market

Posted: 5/6/2016 4:15 PM ET

Stocks Manage Gains Despite Jobs Report Miss

U.S. stocks managed to move above the flatline in afternoon action
and close the regular trading session with decent gains, displaying some
resiliency in the face of a disappointing monthly labor report which
showed job growth missed forecasts and the unemployment rate failed to
decline. Treasuries were lower and the U.S. dollar was nearly unchanged,
while gold and crude oil prices advanced.

The Dow Jones Industrial Average (DJIA) advanced 80 points (0.5%) to
17,741, the S&P 500 Index gained 7 points (0.3%) to 2,057, and the
Nasdaq Composite added 19 points (0.4%) to 4,736. In moderately-heavy
volume, 955 million shares were traded on the NYSE and 1.8 billion
shares changed hands on the Nasdaq. WTI crude oil ticked $0.34 higher to
$44.66 per barrel, wholesale gasoline increased $0.01 to $1.60 per
gallon, and the Bloomberg gold spot price gained $11.01 to $1,288.75 per
ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to
six major world currencies—was flat at 93.85. Markets were lower for the
week, as the DJIA declined 0.2%, the S&P 500 Index lost 0.4% and
the Nasdaq Composite decreased 0.8%.

Cigna Corp.
(CI $131) posted 1Q earnings of $2.32 per share, above the $2.16
estimate, as revenues rose 6.0% y/y to $9.9 billion, below the projected
$10.0 billion. CI raised its full-year EPS outlook and reaffirmed its
revenue guidance. Separately, the company said in light of the
complexity of the regulatory process and the dynamic environment, it is
possible that regulatory approval of its merger with Anthem Inc. (ANTM $137) may not be obtained in 2016. Shares closed lower.

Herbalife Ltd.
(HLF $64) achieved 1Q EPS ex-items of $1.36, well above the $1.09
expectation, with revenues rising 1.0% y/y to $1.1 billion, roughly in
line with forecasts. HLF raised its full-year profit outlook.
Separately, the company said it is in late-stage talks regarding the
investigation into its marketing practices with the Federal Trade
Commission (FTC), estimating that if a settlement is reached, the likely
cost would be $200 million. HLF rallied.

Endo International PLC.
(ENDP $16) fell over 35% after the pharmaceutical company slashed its
full-year guidance, despite topping the Street's 1Q EPS and revenue
projections. The company cited increasing competitive and pricing
pressures across both its generics and branded businesses, as well as
delays on regulatory actions related to certain products.

April labor report misses job growth expectations

Nonfarm payrolls (chart)
rose by 160,000 jobs month-over-month (m/m) in April, compared to the
Bloomberg forecast of a 200,000 increase. The initial rise of 215,000
seen in March was revised to a gain of 208,000 jobs. The total downward
revision to job gains in March and February was 19,000. Excluding
government hiring and firing, private sector payrolls increased
by 171,000, versus the forecasted gain of 195,000, after expanding by a
downwardly revised 184,000 in March, from the 195,000 rise that was
initially reported. Job gains occurred in professional and business
services, health care, and financial activities, while job losses
continued in mining.

The unemployment rate remained at 5.0%, compared to expectations of a dip to 4.9%, while average hourly earnings grew by 0.3% m/m, matching projections, and March's 0.3% rise was adjusted to a 0.2% increase. Finally, average weekly hours rose to 34.5 from March's unrevised 34.4 hours level, in line with expectations.

The job growth, which was the lowest in seven months, likely exacerbated
recently flared up global growth concerns and could be preserving
worries about a potential U.S. recession. However, over the past 12
months, employment growth has averaged 232,000 per month, adding
credence to Schwab's Chief Investment Strategist Liz Ann Sonders'
analysis in her article, Recession: Your Time is Gonna Come … But Not Yet,
that data still suggests although we’re unlikely to exit from a
muddle-through state, the risk of recession is objectively low.

Also, an upbeat aspect of the report was the rise in wages, which now
have increased 2.5% over the past 12 months, an acceleration from the
2.3% pace in the prior month. Wage growth helps underpin consumer
spending, which is the main driver of the U.S. economy and could help
the housing market—another key economic driver—improve further as noted
by Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA,
in the latest Schwab Sector Views: A Housing Update—and Why It Matters. Read both articles at www.schwab.com/marketinsight and follow Liz Ann and Schwab on Twitter: @lizannsonders and @schwabresearch.

Consumer credit, released in the final hour of trading, showed
consumer borrowing expanded by $29.7 billion during March, well above
the $16.0 billion forecast of economists polled by Bloomberg, while
February's figure was adjusted down to an increase of $14.2 billion from
the originally reported $17.2 billion. Non-revolving debt, which
includes student loans and loans for vehicles and mobile homes, rose
$18.6 billion, while revolving debt, which includes credit cards,
increased by $11.1 billion.

European equities finished mixed, posting a solid weekly loss. Traders
digested the softer-than-expected U.S. April employment report that
appeared to dampen Fed rate hike expectations, likely helping crude oil
prices overcome early pressure to boost the energy sector, and
supporting an upside reversal in basic materials stocks. Basic materials
issues showed some resiliency and the euro gained modest ground on the
U.S. dollar, while bond yields in the region mostly moved lower. For our
latest analysis on Europe, see Schwab's Chief Global Investment
Strategist, Jeffrey Kleintop's, CFA, article, Eight Years Later: Europe's Economy is Back and its Stocks are Leading Global Markets, at www.schwab.com/marketinsight, and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished mostly to the downside amid cautious trading
ahead of today's key employment report in the U.S. Japanese stocks
declined, returning to action following a three-day holiday break with
the yen showing some late-day strength to weigh on the markets. Chinese
stocks fell with the recent pullback in commodity prices pressuring the
resource sector. Also, this week's reports on manufacturing and services
sector activity, which showed growth slowed, continued to foster
uneasiness regarding the health of the world's second largest economy.
Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA,
provides analysis of China in his article, Trust but Verify: Five Independent Indicators of China's Economy, and Schwab's Director of International Research, Michelle Gibley, CFA, offers 5 Reasons China Won't Crash the Global Economy in 2016.

Indian equities dipped ahead of the U.S. jobs report, while Australian
securities rose after overcoming early pressure as the Reserve Bank of
Australia lowered its inflation outlook, sending the Australian dollar
lower. The forecast comes as inflation was cited as a reason for the
central bank to unexpectedly cut its benchmark interest rate this week.
Schwab's Michelle Gibley, CFA, offers commentary on the global monetary
policy front in her article, Are Central Banks Out of Options?. Read all these articles at www.schwab.com/oninternational, and be sure to follow Jeff and Schwab on Twitter: @jeffreykleintop and @schwabresearch. Markets in South Korea remained closed for a holiday.

Stocks pullback on soured global sentiment

U.S. stocks posted a back-to-back weekly loss as global growth sentiment
was challenged by U.S. and Chinese manufacturing reports clinging to
expansion territory, and U.K. manufacturing output unexpectedly
contracting, while the Reserve Bank of Australia surprisingly announced a
rate cut. Also, volatility in the Japanese yen persisted and banking
results in Europe did little to soothe heightened concerns about the
health of the sector. Reports showing solid expansion in the
all-important U.S. services sector and a surprising upwardly revised
eurozone manufacturing growth were largely overshadowed. Crude oil
prices pulled back to weigh on the energy sector and basic materials
stocks saw pressure, while Treasury yields moved lower and the U.S.
dollar gained some ground. Earnings season, which is now in the home
stretch, continued to paint a mixed picture, with about 76% of the 437
companies that have reported in the S&P 500 topping profit
forecasts, while only about 54% have bested sales projections, per data
compiled by Bloomberg.

As noted in the Schwab Market Perspective: Great Expectations!,
currency moves have been a hot topic during 1Q earnings season with a
lot of companies citing the strong dollar over the past year as a drag
on profits. Others in Europe and Japan have acknowledged concerns over
weaker exports stemming from the sharp year-to-date rise in their
currencies. These drags may begin to fade if currency moves become less
pronounced, and may help to lift earnings out of the slump they have
been in for the past year or so. Schwab's Chief Global Investment
Strategist, Jeffrey Kleintop, CFA, notes in his article, Earnings Season for Investors: It's a Marathon, Not a Sprint, the return of earnings growth is a key factor in getting global stocks to move materially higher. Read more at www.schwab.com/marketinsight. Also, follow Schwab and Jeff on Twitter: @schwabresearch and @jeffreykleintop.

Health of the consumer set to take center stage

Next week's domestic economic calendar is poised to be headlined by data pointing to the health of the key U.S. consumer, with the releases of April retail sales and the preliminary University of Michigan Consumer Sentiment Index for May. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, maintains in his latest Schwab Sector Views,
our marketperform rating for the consumer discretionary sector, as the
American consumer continues to present a mixed picture. Data on retail
sales and consumer confidence suggest a still-cautious shopper, but we
think these reports underestimate what is actually occurring, as some
services and experience-type items aren’t included in those numbers. The
trend may also be shifting as consumers appear to have slowed paying
down their debt balances, potentially a positive development for
spending, but still seem reluctant to increase their borrowing. Read
more at www.schwab.com/marketinsight and follow Schwab on Twitter: @schwabresearch.

Other key U.S. reports next week include: the NFIB Small Business Optimism Index, wholesale and business inventories, the JOLTS Job Openings report, the Import Price Index, and the Producer Price Index.

Schwab Center for Financial Research ("SCFR") is a division of Charles
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